UPDATE: BofA Merrill Lynch Upgrades ITT Educational Services to Buy from Neutral, Raises PT to $49.00 from $42.00

In a report published Friday, Bank of America Merrill Lynch analyst David Chu upgraded ITT Educational Services, Inc. ESI to Buy from Neutral, raising its price target to $49.00 from $42.00. According to the report, the upgrade reflects the regulatory risks ESI faces but the analysts believe the disparity is too wide. “For risk-tolerant investors, we see positive drivers for the stock: 1.) student demand is outpacing the majority of industry peers, 2.) ITT is better positioned as it focuses on associate degree level IT programs and faces less online competition from traditional schools, 3.) consensus estimates are too low, 4.) student loan-related risks are manageable, 5.) regulatory concerns are real but overdone, and 6.) a short squeeze (34% of shares sold short) could drive significant upside,” the report noted. “We are raising our target by $7 to $49, or 14x our 2015E EPS.” Some key risks include weak demand across the industry. ESI's prior private loan portfolios largely contribute to regulatory risks as well as as the company no longer grants new off-balance sheet loans but prior loans have led to several investigations which are outstanding. ESI closed Thursday at $41.77 with shares trading up at 2.43 percent.